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From carbon measurement to the necessary financing of reduction actions
Many companies making a commitment to the climate today simply measure their carbon footprint. While this is a necessary first step, it is not sufficient to ensure the company's resilience in the context of a low-carbon transition.
Once the main emission sources have been identified, how can an effective decarbonization plan be drawn up?
How can we identify the most relevant actions?
And above all, how can we anticipate the financial resources needed to implement our action plan?
A successful climate strategy therefore requires the involvement of all the company's stakeholders, and in particular its financial management, since any change represents either a cost or a savings opportunity. It is therefore essential to translate the impact of decarbonization actions into financial terms, and to make this information accessible to as many people as possible.
A practical tool can be made available to decision-makers:the Marginal Abatement Cost Curve (MACC).
But what lies behind this rather barbaric name?
What is the Marginal Abatement Cost?
The marginal abatement cost of a decarbonization solution corresponds to its marginal cost, i.e. the cost of the last unit produced, divided by the emissions it will reduce. It is therefore expressed in euros per tonne of CO2e emissions reduced, or €/tCO2e.
This concept emerged in the 1990s and was popularized by McKinsey in 2007.
Let's take a concrete example. An industrial company wants to install solar panels on its roof to reduce its electricity consumption:
- The installation will cost him €80,000, amortized over 20 years or €4,000/year.
- 200€ for upkeep, cleaning and maintenance per year
This represents a total cost of €4,200/year.
- Reduced emissions are estimated at 2 tonnes of CO2e per year.
The marginal abatement cost of this decarbonization action is therefore €2,100/tCO2e.
Visualize the carbon and financial impact of a decarbonization action plan.
Within a decarbonization action plan, some emission reduction actions will require expenditure and therefore have a "positive" cost for the company, while others, by changing production methods, energy consumption or supply sources and quantities, will generate immediate savings for the company and therefore have a "negative" cost.
The marginal abatement cost is a good indicator for prioritizing decarbonization actions according to their carbon impact and their financial impact, whether positive or negative. In particular, it can be used to identify which actions are likely to maximize greenhouse gas emission reductions for an equivalent level of financial effort.
Once the costs of each action have been calculated, it is important to be able to compare them visually. This is where the marginal abatement cost curve comes in.
On this curve, the various decarbonization actions are represented in the form of a rectangle:
- The width of the rectangle on the x-axis corresponds to reduced emissions, in tC02e.
- The height of the ordinate rectangle corresponds to the marginal abatement cost of the action, in €/tC02e.
As we have seen, some actions can have a negative cost, such as reducing food waste. For a better visualization of actions on the curve, they are generally sorted from left to right according to their marginal abatement cost, from the most financially profitable on the left to the most costly on the right.
Thus, the MACC makes it possible to visualize the actions to be undertaken as a priority in order to respect the reduction trajectory set by integrating the financial dimension and not just the carbon dimension:
- The larger the rectangle of an action, the greater the reduction in the company's carbon footprint.
- The flatter the rectangle, the more attractive it is to implement a low-cost decarbonizing action.
- The greater the height of an action's rectangle, and the lower the rectangle (on the left of the graph), the more the action represents substantial savings while having a decarbonizing impact.
- The greater the height and the higher up (on the right of the graph), the more costly the action will be to deploy.
MACC and the cost per tonne of Carbon as a decision-making tool.
The MACC must be updated regularly to take account of changes in costs and actions already undertaken.
As part of France's National Low Carbon Strategy, this tool is used in particular to compare abatement costs with a Social Value of Avoided Carbon (VSC, in €/tCO2eq), which corresponds to the effort that society as a whole is prepared to make to reduce greenhouse gas emissions [1]. This value is very close to the value of a tonne of carbon on the regulatory market, around €80/tCO2e at the end of October 2022. If the cost of action is lower than this VSC, it should be applied as a priority.
Similar reasoning can be applied in a company that can set itself an internal carbon price and decide that all actions costing less than this price should be deployed, because in the long run, the company will come out ahead. This will be even more relevant when the internal carbon price is truly associated with regulatory constraints, and this applies to all types of company.
The limits of MACC.
Although a very practical decision-support tool, MACC has its limitations. For example, it does not distinguish between the cash flows required each year: does the action require a high initial investment, or rather high annual operating costs? Nor does it take into account the technical and operational feasibility of actions.
In addition, building a MACC can be laborious, since it involves calculating both the cost and the impact of possible actions, with costs that can vary over time and depend on the different entities within an organization.
Relying on a MACC with "fresh" data is, however, necessary to ensure the proper implementation of an ambitious decarbonization plan.
Sources
1. Criqui P. (2021), Les coûts d'abattement. Part 1 - Methodology, report by the commission on abatement costs, France Stratégie, June.
2. Quinet A. (2019), The value of climate action. Une valeur tutélaire du carbone pour évaluer les investissements et les politiques publiques, report, France Stratégie, February.
3. CO2: the European carbon market in seven questions - https://www.vie-publique.fr/questions-reponses/282323-co2-le-marche-du-carbone-dans-lunion-europeenne
4. Internal carbon pricing: a PIC solution for companies? - https://www.institutmontaigne.org/publications/prix-interne-du-carbone-une-solution-qui-tombe-pic-pour-les-entreprises